Should Commercial and Investment Banks be Separated? (S. 1709)

What is S. 1709?

(Updated March 15, 2018)

This bill would seek to reduce risk in the financial system and the likelihood of future financial crises by implementing a number of regulatory reforms — most notably preventing banks that consumers use for their checking and savings accounts from offering riskier financial services. It would reinstitute repealed provisions of the Glass-Steagall Act that required the separation of commercial and investment banking, large financial institutions that currently offer both services would have to break up into smaller, distinct units.

Traditional banks that offer consumers checking and savings accounts and are insured by the Federal Deposit Insurance Corporation would be prohibited from offering more complex and risky financial services such as:

• Investment banking — like buying and selling securities or other financial products;

• Insurance;

• Proprietary trading;

• Hedge fund and private equity activities.

Banks and bank holding companies would be prohibited from owning or otherwise controlling a nonbanking entity that offers the types of financial services listed above, closing an existing exemption which allows those activities.

Argument in favor

For a half-century after the Great Depression commercial and investment banks were separated, and the U.S. financial sector avoided a significant crisis. Bringing back that separation would be a positive for banks and protect taxpayers from bailing out banks that took too many risks.

Argument opposed

Breaking up large, multi-faceted financial institutions is going to have a negative impact on the economy, as they'll now have fewer resources to facilitate the type of lending that they now make. Not only that, but this bill by itself doesn’t end the threat to taxpayers posed by “too big to fail” banks.

Impact

Consumers of financial products; banks, investment banks, hedge funds, and private equity firms; and federal financial regulators.

Cost of S. 1709

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Sponsoring Sen. Elizabeth Warren (D-MA) cited the need to keep banks from engaging in risky investments like those which sparked the 2008 financial crisis as the primary reason she introduced this bill:

“Despite the progress we've made since 2008, the biggest banks continue to threaten our economy. The biggest banks are collectively much larger than they were before the crisis, and they continue to engage in dangerous practices that could once again crash our economy. The 21st Century Glass-Steagall Act will rebuild the wall between commercial and investment banking and make our financial system more stable and secure."

Sen. John McCain (R-AZ), the lead cosponsor of this bill, concurred that removing the barrier between commercial and investment banks spurred excessive risk taking, and that taxpayers shouldn’t be on the hook when those investments go bad:

“Big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured deposits. If enacted, the 21st Century Glass-Steagall Act would not end Too-Big-to-Fail. But, it would rebuild the wall between commercial and investment banking that was in place for over 60 years, restore confidence in the system, and reduce risk for the American taxpayer.”

Currently, this legislation has nine cosponsors — including six Democrats, two Independents, and one Republican. It’s also worth noting that four of the 2016 presidential hopefuls endorsed the idea of reinstating the Glass-Steagall Act, with Bernie Sanders and Martin O’Malley on the Democratic side, plus Ben Carson and Mike Huckabee signalling their support as Republicans.

Of Note: While this bill is known as the 21st Century Glass-Steagall Act, the original Glass-Steagall Act was passed in 1933 in response to conditions in the financial sector that precipitated the Great Depression. Its primary provision — the separation of commercial and investment banks — was repealed in 1999 with the passage of the Gramm-Leach-Bliley Act.

Media:

• Sponsoring Sen. Elizabeth Warren (D-MA) Press Release
• Sen. Warren Fact Sheet (PDF)
• American Banker
• The Hill
• Huffington Post
• ThinkAdvisor